Rajkumar Mills Ltd vs C.I.T. Bombay

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Appeal (civil) 153 of 1953

Decision Date: 20 October 1954

Coram: M.C. MAHAJAN, S.R. DAS, S.J. IMAM, N.H. BHAGWATI, T.L.V. AIYYAR

In this appeal, the Court recorded that the petitioner, Rajkumar Mills Ltd, was a non-resident company that had been assessed to income tax for the assessment year 1942-43. The assessment covered, among other items, the profits earned from the sale of textile goods valued at Rs 4,21,871 that were supplied to the Government of India, and the profits from goods valued at Rs 6,02,911 that were supplied to merchants in British India on orders obtained through “reporters.” The assessment was upheld by the appellate tribunal and by a further appeal to the Tribunal. Subsequently, the Tribunal referred three questions of law to the High Court. The first question concerned whether the profits arising from the sales to the Government of India accrued or arose in British India. The second question dealt with whether the profits generated by the company’s paid employees in British India accrued or arose in British India. The third question related to whether sale proceeds amounting to Rs 1,37,469-13-9, which necessarily included profits, were received in British India by or on behalf of the assessee company. The third question was not pressed before the High Court.

The High Court examined the first two questions and found that the statement of the case prepared by the Tribunal was unsatisfactory. It observed that the relevant correspondence and documents were scattered throughout the statement and its annexures, making it difficult to discern the connection between the facts. Consequently, the High Court deemed it necessary to remit the matter back to the Tribunal, but it instructed the Tribunal not to submit another statement of the case. Instead, the High Court gave specific directions and required the Tribunal to decide the issues in accordance with those directions. Regarding the sum of Rs 6,02,911, the High Court noted, from the assessment order, that Rs 5,80,069 had actually been received in British India. It directed the Tribunal to determine whether that amount had indeed been received in British India and, if so, to consider the question of accrual or arising of profits only with respect to the balance, that is, Rs 6,02,911 less Rs 5,80,069. The High Court refused leave to appeal to this Court, prompting the appellant to seek special leave. Special leave was granted by an order of this Court dated 23 December.

In this case the Court recorded the facts that were essential for deciding questions numbered one and two. First, in approximately November 1940 the Government of India issued an invitation to tender, seeking supplies of the items listed in the attached schedule. On 14 November 1940 the appellant responded by submitting a tender form in which it offered to supply one hundred fifty-one thousand seven sheets, expressly agreeing to comply with the contractual conditions printed below the schedule and quoting the price, timing and rate of delivery that were set out in the schedule. Subsequently, on 17 December 1940 the Government of India sent a letter to the appellant indicating its intention to accept the tender, but only for a quantity of fifty-one thousand three hundred and four sheets and subject to the conditions contained in Indian Standard Specification 12(S) as they applied to that quantity and the delivery terms specified therein (referred to as Exhibit C). The appellant replied with a letter confirming the purported acceptance and stating that it would fulfil the order within the prescribed period. The appellant then executed the order, dispatched the goods by rail to Indore, and had the consignment inspected, approved and certified by the Government Inspector. The railway receipt and the Inspector’s certificate were forwarded by the appellant to the Government, and the Government made payment for the goods at Indore.

Second, the appellant employed agents, referred to as “reporters,” to obtain orders from buyers located in British India. These reporters conveyed to the appellant the offers they received from the British-Indian purchasers. The appellant would either accept those offers or propose higher rates; in the latter situation the purchasers agreed to the higher rates and the reporters informed the appellant that the goods had been sold at those increased rates. The appellant confirmed these transactions to the reporters, indicating that the sales had been finalized. A formal document embodying the offer was then prepared and signed by the purchasers, requesting the appellant to supply the specified goods. This offer was conditional upon written acceptance by the appellant, either in whole or in part, within fifteen days of the document’s date; failure to accept within that period would result in the offer being deemed cancelled.

The High Court, in its analysis, held that the sole basis on which the revenue authorities could levy tax on the proceeds of sales in British India was that the contracts of sale had been concluded in British India, thereby causing the profits to accrue or arise there. Accordingly, the Court issued the following directions concerning the two categories of sales. First, the Tribunal was directed to examine whether Exhibit C amounted to a counter-offer. If the Tribunal concluded that Exhibit C was indeed a counter-offer, it must then determine whether the appellant accepted that counter-offer, because such acceptance would mean that the sale contract was formed in Indore rather than in British India. If the Tribunal found that Exhibit C did not constitute a counter-offer, or that although it was a counter-offer there was no acceptance, the Tribunal could infer that the parties treated Exhibit C not as a counter-offer but as an acceptance itself, leading to the conclusion that the contract was concluded in British India and not in Indore. Second, the Tribunal was instructed to consider the evidence presented by the appellant and decide whether a written acceptance of the merchant’s offer existed. If the Tribunal found that a written acceptance was present, it would follow that the sale was effected in Indore and not in British India; conversely, if the Tribunal determined that no such written acceptance existed, it was to uphold its original finding that the sale had taken place in British India.

The Court explained that the Tribunal was required first to decide whether Exhibit C constituted a counter-offer. If the Tribunal concluded that Exhibit C was not a counter-offer, or that it was a counter-offer but had not been accepted, the Tribunal could infer that the parties had treated Exhibit C as the acceptance itself. In that situation the Tribunal’s view that the contract of sale was concluded in British India rather than in Indore would be upheld. The second direction instructed the Tribunal to examine the evidence placed before it by the assessee and to determine whether there existed a written acceptance of the merchant’s offer. The Court observed that if the Tribunal found a written acceptance, the sale would unequivocally have been effected in Indore and not in British India. Conversely, if the Tribunal concluded that no written acceptance existed, it should retain its original order that the sale was effected in British India. The Court held that these directions were not consistent with legal principles. To lawfully conclude that the contract for sale of goods to the Government of India was entered into in British India, it was necessary to establish that the Government’s acceptance of the tender occurred in British India, or that Exhibit C, if it represented a counter-offer, was accepted by the appellant in British India rather than in Indore. The Court noted that if such a counter-offer had been accepted by the appellant in Indore—either by a letter of acceptance sent from Indore or by the appellant’s conduct in supplying the goods in accordance with the terms of the counter-offer—then the contract would be deemed to have arisen in Indore, not in British India. Similarly, for the sales of goods to various merchants in British India, it was essential to demonstrate that the merchants’ offers were accepted by the appellant outside Indore, i.e., in British India. The formal documents prepared by the purchasers, which invited the appellant to supply the specified goods, stipulated that the offers were subject to a written acceptance by the appellant, either in whole or in part, within fifteen days of the date of the document, and that failure to accept within that period would render the offer cancelled. The Court explained that if such written acceptances were obtained, the contracts would be deemed to have been concluded in Indore. However, if the offers were not accepted within the prescribed fifteen-day window and were therefore regarded as cancelled, the circumstances surrounding the subsequent supply of the goods would need to be examined. The Court would then have to assess those circumstances to determine, based on the factual context, whether the contract of sale could be said to have been concluded in Indore or in British India. Accordingly, the Court concluded that the High Court had erred in issuing the directions it had given to the Tribunal.

In this case, the Court observed that the High Court had abandoned its advisory role and had instructed the Tribunal not to provide any additional statement of the case, directing the Tribunal instead to resolve the matter solely according to law and the directions previously issued by the High Court. The Court held that the High Court was not authorized to make such an instruction. The Court explained that, had the High Court, after reviewing the statement of the case submitted by the Tribunal, found it difficult to determine whether the contracts for sale were concluded in British India, the proper course was to require the Tribunal to furnish a further statement of the case. The Court clarified that the issue of whether the contracts were entered into in British India or in Indore was not a factual dispute for the Tribunal to decide; rather, it was a question of law that required the High Court to interpret the correspondence, the documents and the parties’ conduct correctly. The Attorney-General openly admitted that he could not support that portion of the High Court’s order and agreed that the High Court should have called for an additional statement of the case concerning questions 1 and 2. The Court also found that the direction given by the High Court regarding the sum of rupees 5,80,069 was unfounded, because the statement of the case provided by the Tribunal did not contain any reference to that amount and therefore the High Court’s direction was erroneous. Consequently, the Court allowed the appeal, set aside the order made by the High Court, and directed the Tribunal to submit a further statement of the case to the High Court on the two questions that had been referred. The respondent was ordered to pay the appellant’s costs of the appeal.